**What is the effective annual rate (EAR or EFF%) for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily**?

Solution

EAR = (1 + Nominal Interest/Number of Period)^Number of Period – 1

Semi-Annual Compounding

EAR = (1 + 12%/2)^2 – 1 = 12.36%

Quaterly Compounding

EAR = (1 + 12%/4)^4 – 1 = 12.55%

Monthly Compounding

EAR = (1 + 12%/12)^12 – 1 = 12.68%

Daily Compounding

EAR = (1 + 12%/365)^365 – 1 = 12.75%